Dow’s 8-week rally comes to an end as tax-delay concerns persist

U.S. stock benchmarks closed mostly lower on Friday, putting an end to multiweek winning streaks by the major indexes as investors expressed nagging anxiety about a possible delay in much-anticipated corporate tax cuts.

However, some strong corporate results limited the day’s decline and kept the Nasdaq in barely positive territory.

What did stocks do?

The Dow Jones Industrial Average
DJIA, -0.67%
fell 39.73 points, or 0.2%, to 23,422.21. The S&P 500
SPX, -0.55%
ended down 2.32 points to 2,582.28, a decline of 0.1%. The Nasdaq Composite Index
COMP, -0.22%
rose 0.89 point to 6,750.94, or less than 0.1%, after earlier trading in negative territory. The tech-heavy index was supported by strength in semiconductor stocks.

For the week, the Dow fell 0.5% while both the S&P and the Nasdaq lost 0.2%. Both the Dow and the S&P had risen for eight straight weeks, while the Nasdaq broke a six-week rally. All three indexes are hovering near record levels.

The Russell 2000
RUT, +0.12%
meanwhile, rose 0.1% on Friday. However, the index of small-capitalization stocks, which is seen as having a higher correlation to the prospects of tax reform, fell a more pronounced 1.2% over the week.

What drove the market?

The Senate Finance Committee on Thursday released its draft tax bill, which differed from the House Republicans’ plan. One key divergence is a proposal to defer implementing a cut in corporate tax to a 20% rate from 35% until 2019, rather than next year as put forward in the House plan.

The two versions of the tax overhaul will be further debated and negotiated before the final vote, and investors are losing faith that the bill will be passed before Thanksgiving or even Christmas.

The prospect of a major tax plan has been one factor propping up the U.S. stock market recently, as investors see tax cuts supporting company earnings and boosting the economy.

Traders also followed President Donald Trump’s visit to Asia, where the U.S. leader delivered a strong message on trade, defending economic nationalism and saying the U.S. won’t enter into multilateral deals that “tie our hands.” Speaking at the Asia-Pacific Economic Cooperation summit in Vietnam, the president declared he won’t “let the United States be taken advantage of anymore” when it comes to trade, seemingly delivering a rebuke to China.

What did strategists say?

“Markets have had a direct correlation to the tax plan, and have been falling on signs that progress is slowing down, and the idea that corporate taxes will be cut later than we had been expecting,” said Richard Sichel, chief investment officer at Philadelphia Trust Co.

“If we see some progress, investors will start feeling better. Everyone is keyed in on this and the market is looking for it, although we just had a nice earnings season, and while this isn’t a cheap market, it isn’t frothy either,” he said. “People can find different assets that look attractive from a long-term perspective.”

“Senators remain wary that drastic changes still need to be made in order to adhere to their more stricter fiscal rules, such that the tax bill can be voted through with a simple majority. With the Congress weeklong Thanksgiving recess starting next Friday, the odds of a GOP tax plan landing on President Trump’s desk this side of Christmas remain slim-to-none. A growing realization of this will see the dollar slide even lower,” said Viraj Patel, foreign-exchange strategist at ING, in a note.

Which stocks are in focus?

Walt Disney Co.DIS, -0.88%
shares rose 2.1% despite reporting an earnings and revenue miss late Thursday. Disney also announced it will be making a new “Star Wars” trilogy, as well as developing a live-action TV series tied to the sci-fi classic. The news lifted the stock, which in turn limited the Dow’s decline.

Nvidia Corp.NVDA, -3.04%
shares rose 5.3% after the graphic chip maker’s quarterly results out late Thursday topped Wall Street estimates. With the day’s advance, the stock has more than doubled over the course of 2017 thus far. The PHLX Semiconductor Index SOX, -1.21%
rose 0.7% on the day, helping the Nasdaq close in slightly positive territory.

J.C. Penney Co.Inc.
JCP, -0.52%
rallied nearly 15% after the department store retailer reported third-quarter revenue that came in above analyst forecasts. It also reported an adjusted net loss that was narrower than had been expected.

Health-care stocks were the biggest decliners of the day, with the sector down 0.7% in a broad decline. Among the biggest percentage losers, Baxter International Inc.
BAX, +0.01%
was down 2.1% while Medtronic PLCMDT, -1.09%
was off 1.8%. Humana Inc.
HUM, -0.36%
shed 1.2%.

What was in focus in economic data?

In the latest economic reports, a read on consumer sentiment fell to 97.8 in November, below the 100.7 that had been expected by analysts.

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